The Paycheck Protection Program, created on March 27, 2020 under the Coronavirus Aid, Relief, and Economic Security Act (H.R. 748) (the "CARES Act"), empowers authorized Small Business Association (the "SBA") lenders to provide up to $659 billion of loans to businesses and not-for-profit organizations to help cover payroll costs and certain eligible non-payroll costs. As of July 17, 2020, approximately $131.3 billion remained available. To give small business owners and not-for-profit organizations more time to take advantage of the program, Congress approved the extension of the deadline to apply for a loan under the Paycheck Protection Program from June 30, 2020 to August 8, 2020. Since its implementation, the Paycheck Protection Program has gone through various amendments and alterations leaving both borrowers and lenders looking for clarification from both the Treasury Department and the SBA. This memorandum is intended to assist borrowers and lenders by pulling together, in one place, the many salient rules and guidelines.

I. Basic Loan Terms

Loans under the Paycheck Protection Program have an interest rate of 1.00%. Loans granted on or after June 5, 2020 have a five-year maturity date. Loans granted prior to June 5, 2020 had a two-year maturity date, which may be extended if the lender agrees. By far the most attractive feature of the loans under the Paycheck Protection Program is the opportunity to have up to the full amount of the loan forgiven if certain conditions are satisfied. In order to give borrowers the opportunity to seek forgiveness, payments on the loans are deferred until the date on which the forgiveness amount is remitted to the lender. If a borrower does not seek forgiveness of the loan (likely because it has not satisfied the conditions), the deferral period is 10 months from the date of the loan.1

II. Certification That Loan Is Necessary

In order to obtain a loan under the Paycheck Protection Program, the business must certify, in good faith, that "the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient." While the Paycheck Protection Program waives the requirement under Section 3(h) of Small Business Act (15 U.S.C. 636) that small businesses must be unable to obtain credit elsewhere, the required certification that the loan is "necessary" has created some concerns on the part of borrowers, lenders, and lawmakers.

On April 23, 2020, the Treasury Department issued guidance instructing applicants to consider both their current business activity and their ability to access other sources of liquidity that are not significantly detrimental to their business. The guidance specifically states that public companies with substantial market value and access to capital markets unlikely could make this certification in good faith. An applicant should be prepared to demonstrate the basis for its certification to the SBA. A lender, however, can rely on an applicant's certification. Borrowers may face civil liability under the False Claims Act for such false certifications.2 Borrowers that applied for a loan under the Paycheck Protection Program before April 23, 2020 and repaid it in full by May 14, 20203 will be deemed to have made the certification in good faith and will not be penalized.

III. Who Can Borrow

Small businesses and not-for-profit organizations with fewer than 500 employees are eligible for loans under this program. The SBA has determined that businesses in certain industries with more than 500 employees may also qualify for a loan under the Paycheck Protection Program if they do not exceed the employee size standards listed in the table found here. The CARES Act waives the Small Business Act's affiliation rules with respect to eligibility of businesses in the hospitality and food industry with more than one location. Therefore, if a business in that industry employs more than 500 workers, but less than 500 at each location, the business is eligible for a loan at each location. The affiliation rules continue to apply to all other borrowers and require careful analysis of all factors surrounding control of businesses with common ownership.

IV. Amount That Can Be Borrowed

Small business owners and not-for-profit organizations may borrow an amount equal to 2.5 times their average monthly payroll costs during a specified historical period, up to a maximum amount of $10 million. Payroll costs include total compensation paid to employees whose principal place of residence is in the United States and who earn less than $100,000 in total annual compensation. Total compensation includes wages and salary, payments for vacation, parental, family, medical or sick leave, allowance for separation or dismissal, payments for employee benefits and payment of state and local compensation taxes. Payroll costs exclude federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, payments to independent contractors and 1099 workers, and qualified sick and family leave under Sections 7001 and 7003 of the Families First Coronavirus Response Act (H.R. 6201). In calculating estimated payroll costs, amounts paid to an employee in excess of $100,000 per year are excluded.

On April 30, 2020, the SBA announced an interim final rule, 13 C.F.R. Part 120, which sets a maximum aggregate loan amount of $20 million for businesses that are part of a single corporate group under the Paycheck Protection Program.4 Businesses are considered part of a single corporate group if they are at least majority owned, directly or indirectly, by a common parent. Applicants that applied for loans or borrowers that received loans after April 30, 2020 under the Paycheck Protection Program in excess of $20 million must withdraw or request cancellation of any pending application or approved loan not in compliance with this rule. Applicants and borrowers that fail to withdraw or request cancellation will not be eligible for loan forgiveness under the Paycheck Protection Program. A lender, however, can rely on the applicant's representation that it is in compliance with this limitation.

V. Permitted Use Of Loan Proceeds

The loan proceeds may be used for payroll costs and to cover utilities, rent payments, and interest on existing debt and mortgages. Payroll costs include payroll costs paid and incurred. The non-payroll costs include interest on mortgage obligations on real and personal property, business rent or lease payments for real and personal property, and payments for electricity, gas, water, transportation, telephone, and internet access. Payment of principal on any mortgage is not permitted. Although these non-payroll costs are all permitted, the amount spent in total for all of these categories may impact loan forgiveness. If more than 40% of loan proceeds are spent to pay these non-payroll costs during the covered period (as defined below), loan forgiveness may be reduced. For more information, see Section VII, Loan Forgiveness Amount, below.

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Footnotes

1. There has been no guidance issued that addresses what constitutes the deferral period if a borrower receives forgiveness on some, but not all, of the loan proceeds.

2. Additionally, borrowers may face criminal and civil liability under 18 USC 1001 and 3571 by imprisonment of not more than five years and/or a fine of up to $250,000, under 15 USC 645 by imprisonment of not more than two years and/or a fine of not more than $5,000 and, if submitted to a Federally insured institution, under 18 USC 1014 by imprisonment of not more than thirty years and/or a fine of not more than $1 million.

3. The Treasury Department extended this date from May 7, 2020 to May 14, 2020 in an FAQ dated May 5, 2020. A full set of FAQs from the Treasury Department can be found here.

4. For the full interim rule, see https://home.treasury.gov/system/files/136/IFR--Corporate-Groups-and-Non-Bank-and-NonInsured-Depository-Institution-Lenders.pdf.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.